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Nominal Rate Vs. Real Rate In Retiring Plan, a question related to personal investing
PaulYeoh
post Jan 21 2011, 11:27 PM
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Hello everybody.

I currently stuck on this question. Could you guys there help me?

"I'm 70 this year and going to retire.
I have accumulated saving of $180,000, conservatively invested. It's yielding 9% interest.
I also have a saving account of $12,000 at 5% interest. I keep this amount intact.
I receive $750/month in security payment for the rest of my life. Given that the payment is an index for inflation.
Suppose that I will live for 20 years more and willing to use up all of my investment. Given that inflation rate is 4%."
Questions:
1. Evaluate my incomes in nominal terms
2. Evaluate my incomes in real terms.


My knowledge in this field is quite limited. Therefore, your solutions will be referred carefully and kept for my own references. Many thanks in advance!

In him,

Paul
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Basi
post Apr 14 2011, 08:10 AM
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QUOTE (PaulYeoh @ Jan 22 2011, 12:27 AM) *
Hello everybody.

I currently stuck on this question. Could you guys there help me?

"I'm 70 this year and going to retire.
I have accumulated saving of $180,000, conservatively invested. It's yielding 9% interest.
I also have a saving account of $12,000 at 5% interest. I keep this amount intact.
I receive $750/month in security payment for the rest of my life. Given that the payment is an index for inflation.
Suppose that I will live for 20 years more and willing to use up all of my investment. Given that inflation rate is 4%."
Questions:
1. Evaluate my incomes in nominal terms
2. Evaluate my incomes in real terms.


My knowledge in this field is quite limited. Therefore, your solutions will be referred carefully and kept for my own references. Many thanks in advance!

In him,

Paul


Hi Paul,

These are my answers (nominal):
Investments: $180,000 * (1.09)^20 = $1,008,793.94
Savings: $12,000 * (1.05)^20 = $31,839.57
Security: $750 * (1.04)^20 * 12 = 19,720.11 (not certain about this one)

The actual would be the same, but each interest rate would be subtracted by 4%. So the equations would be:
Investments: $180,000 * (1.05)^20 =
Savings: $12,000 * (1.01)^20 =
Security: $750 * 20 * 12 =

If you are interested in learning more about long term interest rates and inflation, I recommend reading this article: http://www.cqcabusinessresearch.com/2011/0...evalued-dollar/
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sanjug
post May 4 2011, 06:35 AM
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Thanks for sharing info


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Debra85
post Sep 20 2012, 07:56 PM
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Every retirement plan requires making some key assumptions. One of those important assumptions is the rate of return you are going to get on your investment portfolio. It’s nearly impossible to predict the future so more often than not we use past performance to try and create some assumptions for the future.


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